Looks Like Yahoo's Board Kind Of Screwed Over Marissa Mayer This Week

Can Yahoo, while she is in charge, come up with a new product that will save the company as its current big winners, Web email and the Yahoo.com front page, slowly decline?

Put analogously: Can Marissa Mayer pull off a Steve Jobs, who began turning Apple around by launching the bondi Blue iMac, and really made things work with the miraculous iPod?

Yahoo's board hired Mayer, and not her interim predecessor, Ross Levinsohn because it believes the answer to those questions was yes. Everyone agrees Levinsohn would would have eked lots of value of out of Yahoo's current businesses while he could. Mayer, the board believes, is the next Steve Jobs.

So why did Yahoo's board just make it harder for Mayer to come up with "Yahoo's iPod"?

(Yahoo's iPod, by the way, won't likely be a hardware product--it will be software. And it will probably be a bunch of products, all designed to make Yahoo and better content and advertising platform.)

Earlier this week, Yahoo sold off a huge portion of its stake in Chinese Internet company, Alibaba. Yahoo netted about $4.3 billion in the transaction, after taxes.

Even for a company as huge as Yahoo, $4.3 billion is a lot of money – money that could be put to use in lots of ways that would help Mayer come up with "Yahoo's iPod."

Just for a couple wild examples, Yahoo could, for example, use that money to build a smartphone, or even a gadget that disintermediates the smartphone the way Google Glass might. It could buy several startups that make popular mobile applications that have growing engagement with normal, non-techy Americans.

But instead of giving that $4.3 billion to Mayer to work with, Yahoo's board decided to pay a lot of the money out to shareholders.

This particular act of largesse happens to very much benefit one of Yahoo's biggest shareholders, hedge fund manager Dan Loeb, who, incidentally, was instrumental in bringing in Marissa Mayer as CEO.

Loeb happens to also be a Yahoo board member. In fact, by the accounts of several insiders, Loeb is doing the job that a board chairman does, even if that title actually belongs to another board member, Fred Amoroso.

Now, look.

There is nothing wrong – morally, ethically, strategically, legally – with Loeb and the Yahoo's board decision to return cash to shareholders. The move will still leave Mayer with more than $3 billion to work with, after the retained proceeds from the Alibaba sale are added to Yahooo's existing cash balance. That's not a lot of money compared to Google, Apple, and Facebook, but it's still a lot of cash for a ~$5 billion business.

Loeb got on the board after launching a proxy fight last fall and winning it in the Spring. He put a bunch of his allies on the board. It was a fair fight, and he won. To the victor go the spoils. A source who has talked to Loeb about this issues says that he has always planned for Yahoo to pay out its Alibaba profits to shareholders.

But it still seems odd that Loeb would make the short term cash grab and restrict Yahoo's flexibility. And Mayer might be feeling a little screwed over because of that lost flexibility. [Update: We are not under the impression that Mayer fought Loeb on this and lost. It's too early in her tenure for a fight like that, and in fact, a source tells us that she was on board with this decision.]

The silver lining for Mayer is that there is a way for her to add about another $2 billion to $3 billion to her cash pile by selling off Yahoo Japan and the rest of the Alibaba stake. But we'll save that for our next post. Stay with SAI for that.

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Editors' Picks

You don't seriously believe Yahoo could come up with something like Google Glasses or the next iPod?

She's doing a good job of restructuring the existing business and has enough cash to buy some small startups that can be nurtured into into major growth engines. She doesn't need a couple of overpriced $1B acquisitions, she needs a couple of really smart $200m pickups.